Sloppy planning led to student loan crisis

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WHEN PRESIDENT Obama released his budget recommendations last month, they landed in Congress with a dull thud. After cutting a deal last fall, the House and Senate don’t need anything from the president to move ahead with their spending bills, and election-year politics makes serious spending reform a long shot — a really long shot.

Federal student lending was already on weak footing in 2011, when Obama decided to pour bureaucratic gasoline on an open fire. He loosened standards on an existing program, lowering the cap on student loan payments for government and nonprofit workers to just 10 percent of annual income. After 10 years, any remaining debts are wiped clean. For private-sector workers, loans are forgiven after 20 years.

To Obama’s apparent surprise, when you give away free money — or in this case, someone else’s money — people show up. Enrollment in the program exploded, increasing by 40 percent during the past six months alone. Today, 1.3 million people participate with a combined debt burden over $70 billion. Good luck getting that toothpaste back in the tube.

The broader numbers are even more startling. Total student debt quadrupled over the past decade and now approaches $1.1 trillion, with delinquencies nearing 12 percent — double the rate 10 years ago. Most ominously, while default rates on credit cards and mortgages have fallen well below their financial crisis highs, student loan defaults continue to soar.

A recent study by the Brookings Institution estimates that annual budget costs for Obama’s new program will reach $14 billion. Within the prolific Stafford Loan Program, write-offs have exceeded government projections by 90 percent. Although Obama now wants to limit the amount of loan forgiveness per person, he undermines his own reform proposal by expanding coverage to any student with a loan from Uncle Sam — not just new loans. So much for restraint.

Beyond the costs to taxpayers, Brookings concluded that forgiving loans also creates incentives for colleges to raise tuition even higher. Since 1978, college costs have risen at a rate four times inflation; during the past decade they’ve even outpaced health care costs.

Actions speak even louder than words: During the past two years several law schools have begun covering some debt payments for their graduates — that is, for the 10 years prior to them being written off. As The Wall Street Journal reported, one Georgetown University website boasted until recently that “borrowers might not pay a single penny on their loans — ever!”

Which is worse — the shameless predatory practices of schools like Georgetown, or the naivete of the White House? Yes, it would be nice if everyone borrowing from the federal government had noble motives and a pure heart, but that’s not the world in which we live. Combining foolishly loose standards with lax enforcement is a recipe for disaster.

Beyond the spiraling losses, allowing people to walk away from the cost of their education promotes a sense of entitlement and distorts the traditional value proposition for higher education. Instead of representing an opportunity with real costs and corresponding benefits — such as greater earnings potential — college becomes a right, granted without regard to the benefits of the underlying degree. Yes, education is of enormous value; but not all education is equally valuable. The government shouldn’t guarantee payment for degrees that simply aren’t worth the price.

The solution isn’t to ban student loans but, as Brookings recommends, to eliminate the loan forgiveness program altogether. Why should borrowing for college be treated differently than loans for homes, cars, or health care? Allowing education loans to magically vanish after 10 years simply encourages consumers to shift borrowing from one activity to another. The smart play would be to pay off a car loan or mortgage, while maintaining the largest student loan possible — and leaving taxpayers on the hook.

In the midst of the last decade’s housing boom, easy financing helped drive prices ever higher. Policymakers responded to escalating prices with programs expanding subsidies and helping even more people to finance expensive homes. We know what happened next.

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